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- [00:02]
A
The heart of earning season starts today. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoyam, joined today by Lou Whiteman and our special guest, John Quast. Guys, earning season, really? I think today is kind of the day that marks the beginning. We've got Tesla, we've got Alphabet. Both of those stocks are either going to beat or miss the their estimates and their stocks are going to be up and down. But that's not what we're going to talk about today. We're going to start with the news from Alphabet, and that is Gemini. Lou, they released a new model yesterday, Gemini 3.6 flash did not get a lot of positive reviews from the AI pundit class. What was your take on this? Was this, was this a little bit too harsh or what is going on with Gemini at this point?
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B
First of all, throwing shade on Jamie Dimon and the big bank earnings. So there you go. But all right, look, I, Yeah, well,
- [00:58]
A
I mean, you know, big banks, not nearly as exciting as what's going on in tech right now, is it?
- [01:04]
B
I don't know. But yeah, so it kind of, as you say, fell on deaf ears in part because the new Super Duper model, which I think that's what they're calling it, right? Gemini Super Duper, the frontier model is delayed. But here's the thing, and I think we need to step into normie town here, okay? Because for all of the talk about the frontier models and these cutting edge models, very few people know what's going on there and care. It's not the percentage that you would think. If you scroll on Twitter, about half the global population is using AI. But the number of people using these frontier models, by some estimates less than 10%. So, you know, yes, the people who do care are the ones driving spending. So it does matter some if this Google model isn't the latest and greatest that people wanted. But increasingly, it feels like most of the revenue, most of the work is not going to go to and come from the frontier models. They're just too dang expensive. It's going to come from the most affordable, rational way to do the job. I think there's some cool things here. Alphabet's cyber tool seems very useful. It hunts and patches for vulnerabilities. I don't think that this is a big deal in and of itself. I think Alphabet's job is to just put out a model people are going to use. It seems like that's going on and the rest of it is sort of Just a. It's a fun geek off, but it's a geek off. Yeah.
- [02:33]
A
John, is that what you see here? Is this a battle of the geeks and the normies?
- [02:37]
C
No, I don't know about that. See, I think what's really happening here, I don't think that users are necessarily dissatisfied with Gemini 3.6 flash. I think they are miffed that they don't have Gemini 3.5 Pro yet. And I really think what Alphabet is in danger of doing here is angering its high spend users. And that's not really a good thing because there are users who pay for Pro who were expecting Pro to be released in June because that's what the company said. We're going to release Gemini 3.5 Pro in June and they were expecting that yesterday. And instead what they got was 3.6 flash first. And there are some things that this Flash version can actually do better than the top Pro model right now. That's actually kind of a problem.
- [03:24]
A
Yeah, it is interesting that they, as some of These other labs, OpenAI and Anthropic in particular, are leaping ahead on the very, very bleeding edge. Lou, I want to end with this. Is this a case of some of these companies just maturing into what they're going to be long term? Because we've talked a lot about artificial intelligence spend and all this kind of stuff. But as the business models are starting to form into shape, it seems like Anthropic is winning this kind of coding class. The agents, the people who are willing to put all this stuff together and, and do whatever it is they're doing with Fable. But then you got the regular people who are just using Search and are going, oh man, these AI overview tools are pretty cool. They answer all my questions. And that's flash 3.6 sitting underneath. So is this sort of Gemini and Google saying, hey, you know what, this is where our money is being a little bit faster, a little bit cheaper is going to be great for the bottom line.
- [04:25]
B
I don't want to give them a total pass because the reason Pro isn't out there is because Pro doesn't work the way they want it to, period. They fail whether or not it matters for the business, but it is a setback. And to John's point, the people who really care are going to be miffed. I'm not sure I'd push back a bit, John, on you, on the idea that the decision makers are miffed because Flash is supposed to use 17% fewer tokens and cost less per token. I think the actual decision makers might be fine with that, even if it isn't as powerful. I think the big takeaway is if you would've asked me two years ago who's winning, it would be OpenAI if you would've asked me a year and a half ago. Oh, wow. Gemini is everywhere. This is so new. I know it's a terrible investor takeaway as we know nothing, but I think it is dangerous to read anything long into long term into any one of these announcements. We are still early days and we have no idea what's going to end up happening.
- [05:20]
A
When we come back, we're going to talk about the latest between two of the biggest GLP1 makers in the world. You're listening to Motley Fool Hidden Gems Investing.
- [05:31]
D
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- [06:03]
A
Fool Hidden Gems Investing. One of the interesting headlines yesterday was that Novo Nordisk is suing Eli Lilly. These are the two big companies in the GLP1 space. Ozempic is probably the one that you know, but you got Onjuro. There's basically four products that are relatively similar, similar. But now we're getting to the point where Red or True Tide is coming. That could potentially be a trillion dollar drug, maybe going to be out next year. But John, this is a, this is a big lawsuit between two companies that are fighting over a lot of the same market. What was your takeaway from these two going to battle?
- [06:37]
C
Well, I think it may be a sign of just how desperate Novo Nordisk is getting right now. You know Novo Nordisk's products, Wegovy and Ozempic, I think they do have better name recognition in the GLP1 space, but Eli Lilly actually has a greater estimated market share at 60%. Now you look at the sales trends for these two companies and Novo Nordisk expecting maybe a decline this year, whereas Eli Lilly expecting an increase. And so you look at where things are trending, you look at who has the market share and you look at the growth rate projections over the coming years for GLP1 drugs. It's a huge growth opportunity according to many of the analysts out there. So Novo Nordisk clearly wants this space. And one of the interesting things here is that pricing is actually coming down. So the profit margins are getting squeezed a little bit on these GLP1 drugs. That means that volume, sales, volume really does make a difference. Market share makes a difference. And Novo Nordisk is losing right now. Eli Lilly is winning. And so I think it is getting a little bit desperate.
- [07:44]
B
Yeah.
- [07:44]
A
And Lou, to be clear, they're suing over the marketing of Eli Lilly's products. This is always kind of one of the weird spaces in pharma, is that you can make a drug or a product and you can sell it to customers, but you also have to market it correctly. And they're saying, hey, wait a second, you can't say this or that in your ads. So maybe this is the kind of battle that we want, is fewer ads.
- [08:08]
B
Yeah, I mean, I'm all for that.
- [08:10]
C
Right.
- [08:10]
B
I'd like to join this as a friend of a court, just to get. It might be my age, it might be the fact that I write baseball or watch baseball a lot, which is old people stuff, that the number of pharma ads and do you always have to put a dog in them? So that part's okay. But look, reading the suit, seems like both sides are technically right here. Lilly is accurately giving the results of comparison trials, but oopsie, conveniently forgetting to mention that the trials are a bit dated now that there's an updated Novo pill that does better in the trial. So, yeah, this is, in a way, Novo is desperate, but also, why not? Just like we sort of talked about with AI, both sets of products seem to do the job. Effectiveness seems to vary by release. Like, you know, the latest model is the best model. So, you know, Lilly's banking billions right now. Novo, to the extent that we're talking about it, Novo's already won this. And I don't blame them for going at it. This is a huge gold mine right now. They want to tap as much of it as they can for as long as they can. I don't know if this will win in court, but if nothing else, it's just got us talking about, hey, Novo's got a new product out and it's a lot better in the old one.
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A
The.
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E
Lou.
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A
The thing that I think is interesting here is how much competition. I can't remember maybe back in the when we started to get different versions of Viagra, there was competition like this. But this space has gone from, okay, we're going to be able to charge $3,000 a month for these treatments to. This is kind of just a consumer product at this point. You remember earlier this year we had talked about Novo Nordisk sued Hims and Hers. That went away really quickly because Hims and Hers has a couple million subscribers. They need access to those people if they're going to have sales be declining. So this just seems like another sign that we're entering a new phase in this space where it's going to be, hey, what are the results and what is the price? That's something that pharma companies are not used to talking about all that much.
- [10:02]
B
You don't remember the bathtub ads?
- [10:05]
A
What are the bat. No, I don't remember the bath.
- [10:07]
B
No, no. Yes. Trust me, when, when those mail pills came out, there were plenty of ads. Yes. In fact, they were the. There were Saturday Night Live skits about the number of ads. So, yeah, look, I don't. This is different. It may be on the scale, but I can even go back and remember statin ads when those came out. So this is increasingly the way pharma reaches. Doctors are in a real pinch here because doctors go in trying to do what's best for the patient, but also it's a business. And so if a patient says, hey, I heard about this. Why don't you give me this? That can move the needle on whether or not you get a prescription. This is the quote, unquote, informing the consumer is how these businesses work. Which I guess to Novo's point is why it should be accurate information.
- [11:00]
A
Yeah, it will be interesting to see how the battle plays out, especially as more new products are coming to market. This is hardly the last new GLP1, GLP3, whatever you want to call them. From an investment standpoint, I think the valuations are interesting. Novo Nordisk trading for 3.7 times sales and just 16 times forward earnings estimates. That's what the market is showing you, that that growth slows. They don't really love that. Eli Lilly, on the other hand, trading for almost 15 times sales and 32 times forward estimates. So double the valuation or more depending on which metric you're looking at. So definitely have a higher valuation. And Eli Lilly has been taking advantage of that by buying a whole bunch of potential products that will grow the company in the future. When we come back, we are going to talk about the latest in energy earnings. You're listening to Motley Fool, Hidden Gems Investing.
- [11:54]
E
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- [13:25]
A
Explore further@rangerover.com welcome back to Motley Fool Hidden Gems Investing. One of the earnings reports that did come out this morning was from G.E. vernova. I said I'm going to lodge my complaint for this being one of the worst name companies and we don't even need to explain it. Apparently it has to do with green energy, but the real business is selling natural gas turbines, which we'll talk about. But Louis, results came in pretty good. They almost doubled their free cash flow guidance for this year. You know, I heard comments about people paying a little extra to cut in line to get their gas turbines. This is the demand coming from data centers. What'd you see in the results?
- [14:03]
B
Yeah, so they'd love to talk about wind and renewables and all that, but right now, as you say, gas turbines are driving the bus. It was actually wind isn't doing too well right now, but that's something else. But yes, this is all about data center energy needs and all of that. You know, Travis Greycourt stock is down and it gets to the kind of awkward question we've seen this with Nvidia with memory now Energy, all these things. We all know what's going on here. Data center demand is off the charts. Now, growth has been amazing. But there's two questions for one, will it keep growing? And that's where I that that question. I think investors are starting to say, okay, well maybe it just plateaus. And that's fine for the business. That's great for the business because as you say, cash flow is up, but it's not great for a forward market that always wants growth. The other question with all of these suppliers is do they have the capacity to meet that growth? And on that note, at least I think Vernova is trying. They're going to spend $11 billion across the business and CapEx over the next four years. That's not all turbines, but some of that, a good part of that is just to boost capacity. By comparison, they were spending about a billion dollars a year in past years in capex. So they are kind of more than doubling in the near term. That does imply that they can kind of hit that backlog faster than they could at status quo. So that is somewhat good. But I think the real question here isn't, you know, isn't will it last forever? I think it can last for a while, but can it continue to grow from here? And that's where the market's sort of in a quandary.
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A
Yeah, John, this is one of those interesting spots because it makes sense that there's a ton of demand for energy. But we're asking this almost every day. Is this time different? And in the energy space it seems like we're going to go back to some sort of normal. So is this sustainable, this level of profitability and free cash flow?
- [15:59]
C
Yeah, I mean, GE Vernova shareholders certainly hope that it's sustainable because as Lou pointed out, they are investing capital expenditures into increasing their capacity. And when you look at the turbines in particular, looking to increase that production capacity by 50% by 2030. And so basically they can't make enough turbines right now, so looking to be able to make 50% more annually. And if the demand is there, then great. But if the demand goes back to whatever we call normal, that's actually kind of a liability because now we have a higher operating base in our cost basis. And so that's kind of an issue. I will say when you look at the backlog numbers here, it's very, very promising for GE Vernova. So basically a $176 billion backlog right now, it's expected to increase to 200 billion by next year. This is a company that only has 40 billion in annual revenue. So a $200 billion backlog is remarkable. So that does bode well for shareholders.
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A
Lou John gave a few of the numbers there, but this is one of those. Enterprise value to sales is 6 price earnings multiple is 28. This has been one of the best stocks in the market, to be clear, since March 2024, shares are up 665%. I did not have that on my bingo card. So is this something investors should be excited about or a little leery of right now?
- [17:29]
B
So I want to extend this path just for Nova. I think it's true of Renova, but all this. We love to talk about picks and shovels. And the idea is the famous story is fools that nobody got rich off the gold rush of 1849, but a lot of people got rich selling the picks and shovels to the people trying to get rich. And so the idea is to if AI, you can either buy the hyperscalers or buy the company supplying the hyperscalers. The thing about this is that is always an inefficient way to gain exposure to a trend. Okay? You're not buying directly into the trend. You're buying the kind of, you know, the supply chain into the trend. The only reason to do that is if the trend is so overpriced. It's just a way to get exposure to something without paying up in valuations. Right now, by my looking this morning for Nova is trading at 65 times expected earnings. Earnings. Okay, that's triple the multiple of an Alphabet or a Microsoft or some of these just pure play companies. This is true across the board with pick and shovels. Right now. If you want to invest in AI right now, heck, given the weighting, you could probably just buy the S&P 500. But I think the hyperscalers, the core companies, are actually a more appealing value than any of these picks and shovels right now. Again, you only do this when you're getting a discount. And it's a way to get exposure on the cheap. You're not getting that exposure on the cheap, man.